Foreclosures and the Hedge Market

August 7th, 2008

The latest crisis has shown that foreclosures and the hedge market go hand in hand. It is apparently friendly local hedge fund that has pocketed the mortgages of the area. There are dozens and dozen of hedge funds, private equity bodies and many other types of investors who have forayed into the melting mortgage market during the past few months. They have bought thousands of troubled loans and foreclosed units right across USA. Hedge funds are targeting the mortgage markets.

Hedge funds and their partners aim to make gains from the troubles of banks and others who have invested in mortgages that have turned into worthless houses. The value of houses continues to sink further while Hedge fund groups gloat as they scent blood. They operate by purchasing from those banks in Wall Street who have invested unwisely and are now desperate to divest themselves of these mortgage loads weighing them down. One such company is Merrill Lynch. It said this week that it would sell to Lone Star Funds mortgage-linked investments that were once valued $30.6 billion for a mere $6.7 billion. Lone Star Funds is one of the many firms dealing in distressed investments in Dallas.

Lending industry executives of Wall Street is operating the hedge funds. They claim that they can out perform the banks and other investors in modifying mortgages by giving new affordable contracts to the consumers. Jacob Benaroya of Biltmore Capital Group of New Jersey was upbeat in his statement that they are much better “to deal with than a bank”. This group is purchasing $100 million of mortgage related debt per year. Benaroya added, “We’ve bought (the loan) at enough of a discount that we can make special arrangements with the borrower.”

Some of the hedge fund operators acknowledge they have often bought some real troublesome loans. These are so bad that often two thirds or a half cannot be saved. In that case they have acquired the right to sell off the houses or they allow the former owner to turn over the keys of the house in return for overlooking all outstanding mortgage dues. This is what happened to Edelmira Sayo of northern California. Financial trouble had made her turn over her property to a firm, G8 Capital. The investor had cut the loan by $50,000 but even then she failed to meet the requirements for a new loan because the property value had fallen by about $100,000.

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